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Wages are the backbone of an economy. If workers have difficulty
finding a job or earning sufficient wages, the lack of wages will
be a problem, not just for the workers, but for governments and
businesses. Governments will have a hard time collecting enough
taxes, and businesses will have a hard time finding enough
customers. There can be business-to-business transactions, but
ultimately somewhere “downstream,” businesses need wage-earning
customers who can afford to pay for goods and services.

Even if a business produces a resource that is in very high
demand, such as oil, it still needs wage-earning customers either
to buy the resource directly (for example, as gasoline), or to
buy the resource indirectly (for example, as food which uses oil
in production and transport).

It is not just any wages that are important. It is the
wages paid by private companies (rather than governments) that
are important, as the backbone to the economy. Governments tend
to get their revenues from private citizens and from businesses,
both of which are dependent on wages of private citizens. There
are a few pieces outside of this loop, such as taxes on imports
from foreign countries. With the advent of free international
trade, this source is disappearing. Another piece outside the US
wage-loop is taxes on resource extraction, if these resources are
exported.

Instead of using the analogy of a backbone, perhaps I should say
that wages are the base that ultimately determines the quantity
of goods and services an economy can afford.

Figure 1.
Author’s view of structure of the economy. Non-governmental wages
form the base of the entire economy.

Obviously there are other kinds of income, such as “rents,” but
these, too, ultimately come from wage earners. Furthermore,
businesses cannot earn money to pay dividends unless some
consumer, somewhere, can afford to buy the goods and services
their business is selling.

I have written recently about how the proportion of
Americans with jobs rose to a peak, and since has been declining.

Figure 2. US Number Employed / Population, where US Number
Employed is Total Non_Farm Workers from Current Employment
Statistics of the Bureau of Labor Statistics and Population is US
Resident Population from the US Census. 2012 is partial year estimate.

I decided in this post to look at the dollars these workers are
earning. In particular, I decided to look at wages, other than
government wages, adjusted to today’s cost level using the
“CPI- Urban,”
cost index of the Bureau of Labor Statistics. I
discovered that these wages are doing very poorly. I also
discovered a disturbing connection between high oil prices and
flattening or declining wages. Putting all of these pieces
together suggests a connection to “Limits to Growth.”

Per Capita
Non-Government Wages

If we take inflation-adjusted non-government wages, and divide by
the total US population (not just employed workers), we get a
measure of the extent to which wages have been growing or
shrinking. Some of this growth will be from a second wage-earner
in a family joining the workforce. Some of this growth will be
from families in recent years having fewer children, so that
adults make up a larger portion of the population. If some jobs
move overseas and are not replaced, this will act to reduce
wages.

Figure 3. US per capita non-governmental wages, in 2012 dollars.
Non-governmental wages and population from Bureau of Economic
Analysis; Adjusted to 2012 cost level using CPI-Urban from Bureau
of Labor Statistics.

Comparing Figure 2 and Figure 3, we can see that they follow
generally the same shape. A major portion of the increase in
wages in Figure 3 is thus driven by a higher proportion of the
population having jobs, at least up until the year 2000.

Figure 3 emphasizes how poorly wages have performed since the
year 2000. Average wages on a Figure 3 basis hit a high point of
$19,112 in 2000. They dropped back to $18,145 in 2003. In 2007,
they briefly surpassed the year 2000 high point, hitting $19,573.
More recently they dipped again and (with government deficit
spending) have recovered a bit, rising to $18,053 in 2012. This
is very low by historical standards; it is between the level they
were in 1998 and 1999.

Looking at Figure 3, the other time when wages were flat was the
period between 1973 and 1983. The thing that is striking is that
both the current period and the previous “flat” period took place
during periods of high oil prices (Figure 4, below). The vast
majority of the rise in non-government per capita wages that has
taken place has happened when the inflation-adjusted price of oil
was less than $30 barrel.

Another thing that happens is a change in the competitive
situation that indirectly leads to layoffs. Oil is used in
transporting many types of goods, and is used in producing a wide
variety of products, such as asphalt shingles and synthetic
cloth. Wages don’t rise at the same time as oil prices rise. The
result is a mismatch between what citizens can afford, and the
cost to manufacture and transport products. Some customers are
“priced out” of the market. Businesses find that they must scale
back the size of their operations to produce only the amount
customers can afford. For example, a delivery service will
operate fewer vehicles, if demand is lower, laying off workers.

Changes in trade agreements can also be expected to play a role
in the competitive situation. China started growing rapidly
immediately after it joined the World Trade Organization in December,
2001. The big drop-off in US employment coincides very
closely in time to the time China started growing quickly.

Figure 5. China’s energy consumption by source, based on BP’s
Statistical Review of World Energy data.

Another factor in reduced wages is increased automation, in an
attempt to compete with low-wage countries. An employer may
replace several workers with a single worker, using a new
high-tech machine. The worker with the new machine may earn more,
but the others are left to find jobs elsewhere.

Going forward, increased retirement of “baby boomers” is likely
to add further challenges. Retirees will need to be fed and cared
for, mostly from taxes on current workers. In theory, the
retirement of baby boomers should leave more jobs for unemployed
young people, but this will depend on whether such jobs are
really available.

One important point is that the impact of high oil prices on
wages doesn’t “go away” to any significant extent over time. This
is clear from Figure 4, and is a point I have made previously. Increased fuel
efficiency helps a bit, as do adaptations like finding a job
closer to where a person lives. But high oil prices continue to
make goods that are made using oil less competitive on a world
market. High oil prices also continue to make increased
automation attractive, and continue to keep the cost of transport
of high. Individuals find they need to permanently cut back on
discretionary spending to balance their budgets.

Oil prices are likely to remain high, and in fact, rise in the
future. When we started extracting oil, we began with the easy
(and cheap) to extract oil first. Now, the inexpensive to
extract oil is mostly gone; what is left is high-priced oil.
Over time, the price becomes even higher, as diminishing
returns set in.

The recent publicity about the possibility of more tight oil in
the United States doesn’t change this dynamic. What the press
releases don’t say is that this oil will only be available if
it is sufficiently high-priced. A recent survey by Barclays indicates that North
American oil and gas companies are anticipating less than a one
per cent increase in “exploration and production” expenses in
2013; current North American oil and gas prices are not high
enough to justify much increase in investment.

Per Capita Real GDP

In recent years, the economy as a whole has tended to fare better
than wage earners. This happens partly because deficit spending
is being used to provide income to the many unemployed people,
and partly because businesses are able to “bounce back” from an
earnings point of view better than wage-earners, because they can
cut back the size of their operations to keep profits high.
Sometimes they can even substitute low overseas labor costs, or
automation.

If we compare per capita real (that is, inflation-adjusted) GDP
with oil prices (both in 2012$), this is what we see:

On a per capita basis, real GDP per capita in 2012 is between the
2005 and the 2006 level. This is far better than the situation
with non-government wages. In Figure 4, we saw that in 2012,
non-government wages were only between the 1998 to 1999 level.
Ouch!

Hitting “Limits to Growth?”

I wonder if the situation we are reaching now isn’t “Limits to Growth,” as described by the book by
that name by Meadows et al. written in 1972. The way
we seem to be reaching Limits to Growth is through high
oil prices, and the impacts these high oil prices have both on
wages and on competitiveness with other countries. I explained
some of these issues earlier in this post. There are also impacts
on governments:

Low wages in total mean less tax revenue for governments;

Fewer employed means more government outlays for unemployment
benefits;

Low wages lead to more problems with debt defaults, and
more need for bank bailouts;

Governments can’t raise taxes fast enough or reduce benefits
quickly enough, so they find themselves with rapidly rising
deficits. If governments do raise taxes, workers are even worse
off. If they reduce expenditures (less unemployment payments or
allowing banks to fail), citizens are also unhappy.

Over the last several thousand years, many civilizations have
grown up, reached limits of one sort or another, and eventually
collapsed. Based on the work of Peter Turchin and Sergey Nefedov
in the book Secular Cycles, there were financial issues
not too different from the ones we are seeing now involved in
these collapses. I showed in my post 2013: Beginning of
Long-Term Recession? that there seem to be
significant parallels to our current situation. These collapses
often took 20 years or more, but the situation is still
concerning.

While the situation we are looking at is unpleasant, if we
understand the source of our problems, we can at least look at
our situation a bit more rationally. We may not be able to find
solutions, but we can at least eliminate some approaches as being
unrealistic. We may be able to find partial solutions, such as
making survival possible for a subset of humanity, if not
everyone. If we don’t understand our predicament, there is no way
we can rationally address it.